Balance sheet and income statement data indicate the following: Bonds payable, 10% due in two years)$1,000,000
Preferred 5% stock, $100 par no change during year)300,000
Common stock, $50 par no change during year)2,000,000
Income before income tax for year
550,000
Income tax for year
80,000
Common dividends paid
50,000
Preferred dividends paid
15,000
Based on the data presented above, what is the number of times bond interest charges were earned round to one decimal point)?
A) 1.5
B) 6.4
C) 6.5
D) 5.5

Question

Quizplus · Accepted Answer

The number of times bond interest charges were earned can be calculated using the formula EBIT/Interest expense. EBIT for the year is $550,000, and the interest expense on the bonds is $100,000 (10% of $1,000,000). Therefore, the number of times bond interest charges were earned is 5.5 ($550,000/$100,000). The closest option is C, which rounds up to 6.5.

Balance Sheet and Income Statement Data Indicate the Following: Bonds